Breakthroughs for the Future

Transcription

1 Breakthroughs for the Future Annual Report 215 Year ended March 31, 215

2 Profile In the 1-plus years since its founding in Japan in 196, Bando Chemical Industries, Ltd. has been pursuing industrial development by making various contributions to rubber and plastic processing technologies in such areas as power transmission belts and systems, belts used in precision equipment, and multimedia parts made from urethane and resins. We are highly regarded by customers throughout the world owing to our efforts to develop new technologies and products that meet today s needs while manufacturing and stably supplying people- and environmentally-friendly products of unsurpassed performance and quality. Possessing an unwavering spirit spanning back to our foundation, we will create a brighter future through the ceaseless innovation of our business. Management Philosophy With a spirit of harmony and in good faith, and to ensure the company s growth, the Bando Group will work to earn the trust of our customers and society Contents Profile Snapshot 2 Products 4 History 6 Global Network 8 Highlights 1 To Our Stakeholders and Investors 14 Message from the President 16 eco moving 22 Review of Operations 24 CSR 28 Corporate Governance 3 Management 33 Message from Bando s External Director 34 Financial Section Management s Discussion and Analysis 38 Business Risks 39 Message from the CFO 4 Consolidated Balance Sheets 42 Consolidated Statements of Income and Consolidated Statements of Comprehensive Income 43 Consolidated Statements of Changes in Net Assets 44 Consolidated Statements of Cash Flows 45 Notes to Consolidated Financial Statements Corporate Data / Investor Information 58 by creating and providing products and services of added value and high quality. With pride as members of the Bando Group, we will contribute to society as a whole. Cautionary Note Concerning Forward-Looking Statements This annual report includes forward-looking statements related to the Company s future performance forecasts. These statements are rationally determined by management based on information available at the time and therefore are subject to risk and uncertainty. Actual performance may differ from targets due to such factors as changes in the operating environment. Annual Report 215 1

3 Snapshot Bando Chemical Industries is expanding business in growth markets. The snapshot below describes our strengths and distinctive features. 3 Top Share in OEM Supply of Automotive Belts No.1 global share OEM supply of automotive belts We have built up a good reputation based on our meticulous service to satisfy individual customer needs, excellent quality, and stable supply capabilities. As of the end of fiscal 214, we command the top global share for OEM supply of automotive belts. 1 Core Business in Automotive Parts Fields 215 ( million) Consolidated net sales 95,396 million Sales of automotive parts business 45,68 million Sales of automotive parts business as % of total 47.9% * The auto industry continues to expand, driven by increased motorization in emerging countries and steady market expansion in Europe and the U.S. Automotive businesses account for 47.9%* of total consolidated net sales at Bando. We expect the automotive parts business to provide good growth opportunities moving forward. * Sales of automotive parts business/consolidated net sales 4 Top Share in OEM Supply of Power Transmission Belts for Injection Molds and Machine Tools in Japan Our power transmission belts for injection molds and machine tools have been highly evaluated for their high power transmission capability and durability, and we hold the top share in Japan for these products. No.1 share in Japan Synchronous belts for high-load power transmission applications 2 Overseas Sales Ratio Continues to Expand 5 Building an Even Stronger Financial Position Overseas sales Overseas sales ratio Overseas sales Overseas sales ratio ( million) (%) 5, 5 4, 3, 4 3 We are meeting the needs of our Japanese customers developing global operations and are also expanding our business with overseas customers. Overseas sales are therefore rising and now account for a higher percentage of the total. Capital expenditure / Net interest-bearing debt* D/E ratio Capital expenditure Net interest-bearing debt* D/E ratio ( million) (times) 1,.5 8,.4 6,.3 We are working to build an even stronger financial position, even as we continue the capital expenditures needed for growth. At the end of fiscal 214, our net interest-bearing debt and D/E ratio were at all-time lows. 2, 2 4,.2 1, 1 2, , * Net interest-bearing debt = short-term borrowings + long-term borrowings + corporate bonds cash and deposits. 2 BANDO CHEMICAL INDUSTRIES, LTD. Annual Report 215 3

4 Products The Bando Group s products boast world-class performance and quality based on technologies developed over many years. Bando s specialty products display our superior design and development capabilities. Belt Business Net sales by business segment Conveyor Belts Main Products We excel in OEM business in the automotive, industrial machinery, agricultural machinery and conveyance sectors, where we hold a large global market share. We develop environmentally-friendly power transmission systems and % Strengths and Characteristics A full lineup of rubber conveyor belts and light-duty resin conveyor belts provide comprehensive product lines suitable for various fields. Core Technologies Rubber and resins compound design, dispersion and processing technologies, power transmission system technologies Precisely meeting customers needs with heatand oil-resistant specifications, as well as frayprevention, non-slip, anti-static and many other models G-CARRY TM Pipe Conveyor Belts Automotive Power Transmission Belts Main Products For four- and two-wheeled vehicles Strengths and Characteristics Mr. COOK TM F2224 Non-Stick Belts Lightweight Jointless P-Series Belts Integrated development of automotive auxiliary drive belts and power transmission systems (Tier 1 manufacturer of power transmission belt systems for automotive manufacturers) Development of continuously variable transmission (CVT) high efficiency belts for two-wheeled vehicles RIB ACE TM V-Ribbed Belts Automatic Tensioners Elastomer Products Business We maximize materials characteristics through the use of our precision processing, material and structural design technologies, and add optimal functionality to develop pioneering products with high precision and high Net sales by business segment % TENSION MASTER TM VS Belts quality, in consideration of the environment. Industrial Power Transmission Belts Main Products Core Technologies Elastomer and resins compounding design, dispersion and processing Main Products For industrial and agricultural machinery Strengths and Characteristics Strengths and Characteristics Development of energy-efficient belts and belts suited to high power machinery Global production and sales network, with 21 bases in 14 countries HFD System TM Red TM SII V Belts for agricultural machinery Development and provision of high performance, clean precision parts Development and provision of functional films for various applications, such as in the printing and medical fields BANCOLLAN TM CLEANING BLADE G-Module TM Development Rollers STS/HP-STS/Ceptor TM -VI Long Synchronous Belts BANDO GLANMESSE TM Medical films 4 BANDO CHEMICAL INDUSTRIES, LTD. Annual Report 215 5

5 History We have worked to build trust and brand recognition over more than 1 years since our founding. Without contenting ourselves with this, we will incessantly strive to change and challenge to achieve the next Breakthrough. Opened Representative Office in Argentina History of Global Expansion 214 Developed Thermal Conductive Established new plant in India 213 Sheets for electronic devices Opened technical center in Thailand 213 Reorganized Shanghai-based subsidiary into a management company 212 Commenced sales of TENSION MASTER, a Established subsidiary in Vietnam 212 tension meter featuring an acceleration sensor Opened technical center in China 212 Commenced sales of non-flammable BANDO GLANMESSE Commenced sales of BANCOLLAN Cleaning Blade G-Module Developed BANDO MDEC, a new method for removing Opened Representative 21 microscopic dust Office in Russia 21 Commenced sales of DS5M, double-sided, synchronous power transmission belts 29 Commenced sales of G-CARRY environment-friendly, energy-saving conveyor belts Commenced sales of RIB ACE ECO-HT high-load automotive V-ribbed belts 28 Commenced sales of thin polyolefin films 28 Commenced sales of FlowMetal, low-temperature sintering nanoparticles 28 Commenced sales of the Hyper Flat Drive System Established subsidiary in Singapore Established subsidiaries in the United States and West Germany Equity participation in industrial rubber product 1975 manufacturers in the Philippines and Malaysia 1972 Opened Representative Offices in the United States and West Germany Established subsidiaries in India and Turkey 23 Established subsidiary in Shanghai, China 22 Established subsidiary in Tianjin, China 1998 Established subsidiary in Hong Kong 1995 Established subsidiaries in Indonesia, Malaysia, and South Korea 1988 Established subsidiaries in Thailand and Spain 1987 Established subsidiary in Taiwan Commenced sales of SYNCHROBELT toothed belts 195 Commenced sales of plastic films and sheets 1932 Commenced sales of Japan s first V belts 1921 Commenced production of Japan s first conveyor belts 1913 Commenced production of rubber belts 196 Commenced production of cotton belts Commenced production of Japan s first single-ply conveyor belts Commenced sales of polyurethane products Commenced full-scale production of photocopier cleaning blades Commenced sales of Japan s first light-duty conveyor belts Commenced sales of BANDO Automatic Tensioners, automatic automotive belt tensioners Developed BANDO AVANCE, the world s first dry belt for continuously variable transmissions (CVT) Commenced sales of MULITE high-performance plastics products Commenced sales of RIB ACE automotive V-ribbed belts Other 197 Listed on the First Section of the Tokyo Stock Exchange 1962 Listed on the Second Section of the Osaka Securities Exchange History of Product Development A pioneer belt manufacturer since its founding in Japan, the Company has now grown to manufacture and sell products throughout the world as it continues to develop products in support of industry. 6 BANDO CHEMICAL INDUSTRIES, LTD. Annual Report 215 7

6 Global Network Aiming to become a standout supplier worldwide, we are expanding our global network based in Japan, China, Asia, the United States, and Europe. Europe Asia Bando Chemical Industries Global Network Bando Belt Manufacturing (Turkey), Inc. Bando Jungkong Ltd. Bando Manufacturing (Dongguan) Co., Ltd. Pengeluaran Getah Bando (Malaysia) Sdn. Bhd. Bando Iberica, S.A. Bando Korea Co., Ltd. Bando Siix Ltd. Kee Fatt Industries, Sdn. Bhd. Japan* Bando Europe GmbH Bando Belt (Tianjin) Co., Ltd. Sanwu Bando Inc. Bando (Singapore) Pte. Ltd. Head Office America Bando USA, Inc. Bando (Shanghai) Management Co., Ltd.* Bando (Shanghai) Industry Equipment Element Co., Ltd. BL Autotec (Shanghai), Ltd. Philippine Belt Manufacturing Corp. Bando Manufacturing (Vietnam) Co., Ltd. Bando Manufacturing (Thailand) Ltd.* P.T. Bando Indonesia Bando (India) Pvt. Ltd. Sales by Region (as of March 215) Overseas sales ratio: 48.7% * China Technical Center and Asia Technical Center were opened in 212 and 213, respectively, both of which are developing products with optimal specifications for markets. Japan: 51.3% Asia: 25.6% China: 12.4% Europe, America & other: 1.7% *Japanese business locations are leading the development of environment-friendly products and the expansion of highvalue-added businesses. Business locations Kobe Head Office/ R&D Center Kakogawa Plant Sales and Fabrication Service Affiliates Bando Fukushima Products, Inc. Higashinihon Bando Co., Ltd. Vann Corporation Koyo Sangyo Co., Ltd. Hokuriku Bando, Inc. Nishinihon Bando Co., Ltd. Bando Elastomer Co., Ltd. Ashikaga Plant Tokyo Branch Office Nagoya Branch Office Nankai Plant Wakayama Plant/ Power Transmission Technical Research Center Manufacturing Affiliates Fukui Belt Industries, Ltd. BL Autotec, Ltd. Bando-Scholtz Corporation Other Service Affiliates Bando Trading Co., Ltd. Bando Kosan Co., Ltd. 8 BANDO CHEMICAL INDUSTRIES, LTD. Annual Report 215 9

7 Highlights 1 Year Summary of Consolidated Financial Statements Fiscal year endings are March 31 in the years shown below Net sales 84,257 95,2 98,662 87,453 73,593 84,811 86,372 85,772 93,434 95,396 Operating income 5,57 8,27 7,325 2,115 2,45 5,56 4,571 4,95 5,518 4,797 Operating margin % 6.% 8.4% 7.4% 2.4% 3.3% 6.% 5.3% 4.8% 5.9% 5.% Net income 3,713 3,985 5,289 (255) 1,234 3,333 1,44 2,51 4,28 3,757 Net cash provided by operating activities 6,57 9,641 7,85 7,621 8,724 9,529 6,595 7,4 6,459 8,61 Net cash used in investing activities (8,984) (6,288) (9,83) (4,937) (3,147) (4,922) (4,768) (5,781) (5,38) (3,931) Net cash provided by (used in) financing activities 234 1,888 (1,575) (675) (2,516) 85 (4,363) (463) (1,548) (2,472) Depreciation and amortization 4,661 4,66 5,684 6,73 5,411 4,97 4,84 4,389 4,174 4,386 Capital investment 9,377 7,692 7,166 4,176 2,791 3,381 4,619 5,52 5,46 4,198 Net assets 39,615 42,568 44,972 38,352 4,2 4,542 39,444 43,226 49,277 56,777 Total assets 87,887 96,53 9,81 76,621 78,2 82,95 79,659 82,27 89,623 94,7 Interest-bearing debt 15,499 18,717 18,525 17,669 15,744 17,653 14,595 15,746 15,753 14,487 Shareholders equity* 39,615 41,77 44,46 37,345 39,188 39,677 38,559 42,775 48,772 56,273 Earnings per share Yen (2.55) Net assets per share Yen Annual dividend per share Yen Average number of shares outstanding during the period Thousand shares 12,791 11,31 1,393 1,313 1,294 98,788 97,34 94,811 94,95 94,63 Equity ratio % D/E ratio times ROA % (.3) ROE % (.6) P/E ratio times Payout ratio % Number of employees 3,177 3,393 3,414 3,436 3,285 3,427 3,545 3,592 3,817 3,93 * Shareholders equity for 27 and thereafter = net assets minority interests 1 BANDO CHEMICAL INDUSTRIES, LTD. Annual Report

8 Highlights Major Indicators Fiscal year endings are March 31 in the years shown below Net sales Operating income Operating margin Fiscal 214 Topics Product Development and Others ( million) 1, ( million) 8, (%) 8 8, 6, 6 Opened a demo room for the BANDO MDEC cleaning system, which applies our proprietary contact charging control technology 6, 4, 2, 4, 2, 4 2 HFD System, a next-generation energy-saving transmission belt, was awarded the Kinki Region Invention Prize and the Hyogo Institute of Invention and Innovation s Chairman Award March ( million) 8, Capital investment ( million) 6, Free cash flow Net assets Total assets Net assets ( million) 1, Total assets 215 Participated in the Cabinet Office Strategic Innovation Promotion Program (SIP) Product development February January 6, 4, 4,5 3, 8, 6, 4, Concluded an Agreement for comprehensive industry-university cooperation with Kobe University 215 December 2, , , President Yoshii and Kobe University President shaking hands November Shareholders equity* Equity ratio Shareholders equity Equity ratio ( million) (%) 6, 6. 55, 5, 45, 4, 35, Interest-bearing debt D/E ratio Interest-bearing debt D/E ratio ( million) (times) 3,.5 24, 18, 12, , Annual dividend per share Payout ratio Annual dividend per share Payout ratio (yen) (%) Raw material costs (indicators) Naphtha Cotton Natural rubber Aluminum ROA ROE ROA (%) Exchange rate transition USD THB EUR (%) ROE Commenced sales of Wallpaper Media for inkjet printers. Wallpaper Media Thermal Conductive Sheets Created website for light-duty conveyor belt selection Display of website image Developed Thermal Conductive Sheets that contributes to lower thermal resistance in electronic devices April May June July August September October Management We restructured our subsidiaries and sub-subsidiaries in South Korea (Bando Korea Co., Ltd. acquired Bando Jungkong Ltd., which had been owned by BL Autotec, Ltd., along with other shareholders equity, and made Bando Jungkong Ltd. its wholly owned subsidiary [a sub-subsidiary of Bando Chemical Industries]). 6, /12 12/12 13/12 14/12 15/6 8 1/12 11/12 12/12 13/12 14/12 15/6 March * Raw materials cost (indicators) base is 211/12. * Exchange rate base is 21/ BANDO CHEMICAL INDUSTRIES, LTD. Annual Report

9 To Our Stakeholders and Investors The second half of Bando s five-year mid-term business plan has started. We will make full use of our expanded business foundation and accelerate measures to achieve target figures. Mitsutaka Yoshii President and Representative Director, Bando Chemical Industries, Ltd. In fiscal 214, the second year of Bando s five-year mid-term business plan, net sales increased for the second consecutive year. However, profits declined owing to an increase in personnel expenses in Japan due to an increase in actuarial differences related to retirement benefit obligations, and an increase in selling, general and administrative expenses mainly due to the expansion of overseas business bases. Fiscal 215 marks the start of the second half of Bando s five-year mid-term business plan. As our moves to reinforce the business foundation in India, Thailand, China and Indonesia steadily translate into earnings growth, we will accelerate measures to increase sales and profits. Annual Report

10 Message from the President Performance in Fiscal 214 Sales up but profits down due to higher personnel expenses resulting from expansion of global production structure In fiscal 214, we implemented measures for the second year of its mid-to-long term business plan Breakthroughs for the future. Belt Business sales rose.8% year-on-year to 78,11 million on account of growth, mainly overseas, in automotive power transmission belts and conveyor belts. In the Elastomer Products Business, sales were 15,713 million, an increase of 4.8% year-on-year that reflected robust demand for precision equipment parts, particularly in Japan. As a result, consolidated net sales increased 2.1% from the previous fiscal year to 95,396 million for the second consecutive Consolidated earnings Fiscal 213 results year of growth. However, operating income declined 13.1% year on year to 4,797 million, owing to an increase in personnel expenses from the expansion of production facilities in Asia, as well as an increase in actuarial differences related to retirement benefit obligations in Japan. Net income totaled 3,757 million, a year-on-year decline of 12.2% due to the write-down of impairment losses on manufacturing facilities for high-performance films. We declared a year-end dividend of 5 per share, unchanged from last year, bringing the annual dividend to 1 per share, the same as last year. Fiscal 214 Results YoY Net sales 93,434 million 95,396 million +1,962 Operating income 5,518 million 4,797 million 721 Net income 4,28 million 3,757 million 523 Breakthroughs for the future mid-to-long term business plan: Overview and progress Aiming to be a standout global supplier in two steps: 1st stage and 2nd stage of mid-to-long term business plan In 213, the Bando Group embarked on its midto-long term business plan Breakthroughs for the future, which ends in fiscal 222. Under this plan, we aim to further refine our core technologies and reliable product quality in the fields of rubber, elastomers, and resins where we have built up extensive expertise since the Company s founding to become a standout supplier of belts and high-performance products in the global market. In the first stage of the plan, from fiscal 213 to fiscal 217, we will work to evolve and deepen the Group s current operations, particularly in the belt business, and strengthen research and development as well as market development in order to establish new businesses. In the second stage, from fiscal 218 to fiscal 222, we will create new business to contribute to our earnings, second only to our belt business. Leveraging the two earnings drivers, we will concentrate on expanding earnings to become a truly global supplier with net sales of around 15 billion. As the first step to achieving this plan, Bando aims to generate sales of 1 billion and operating income of 1 billion in fiscal 217, the final fiscal year of the first stage. Overview of the mid-to-long term business plan Breakthroughs for the future Aiming to be a standout global supplier Global development of belt and high-performance product businesses Provide value-added products that contribute to environmental preservation, energy conservation and higher functionality Leverage core technologies and reliable product quality in rubber, elastomers and resins Breakthroughs for the future 1st stage (fiscal 213~217) Evolution and deepening of current businesses Enhancement of R&D and market development Breakthroughs for the future 2nd stage (fiscal 218~222) Realization of aspirations for 1 years ahead Establishment of businesses to accompany the Belt Business BF-1: Five Guidelines Mitsutaka Yoshii President and Representative Director, Bando Chemical Industries, Ltd. Evolution of global market strategy Product evolution Evolution in manufacturing Numerical targets in mid-term business plan BF-1 New businesses creation Evolution in management quality Net sales Operating income Fiscal 217 targets 1, million 1, million 16 BANDO CHEMICAL INDUSTRIES, LTD. Annual Report

11 Message from the President Achieve fiscal 217 targets in sales and profit growth under the mid-term business plan In fiscal 214, the second year of the 1st stage of the mid-to-long term business plan, both sales and operating income fell below our original targets, due to factors such as production stoppages at Korean automakers in the first half of the fiscal year, lower automobile production in Thailand due to political turmoil, and a decline in demand for agricultural machinery in China as government subsidies came to an end. However, we are moving confidently toward the achievement of higher sales and profits under the mid-term business plan. At the Bando Group, we Bando products with top market shares* Top Market Share Top Market Share OEM supply of automotive belts CVT belts for two-wheeled vehicles collectively believe our investments in production facilities in India, Thailand, China and Indonesia over the initial 2.5 years of the mid-term business plan will strongly boost growth in earnings going forward, backed by our products with leading shares of the world market in the OEM supply of automotive belts for automakers, CVT belts for motorcycles, and polyurethane rubber parts for printers. While maximizing these strengths, we intend to make up for some slight lost time in fiscal 214 by reducing costs and steadily implementing key measures from fiscal 215 onward. Automotive automatic belt tensioners (Japan) Polyurethane rubber printer parts Key facilities expansion during first half of the mid-term business plan, BF-1 Top Market Share Top Market Share * Fiscal 214 Location Descriptions Date India / Bangalore Plant Opened integrated production plant Fiscal 213 Thailand / Bando Manufacturing (Thailand) Ltd. Renewed the equipment of the main plant Fiscal 213 China / Bando (Shanghai) Industry Equipment Element Co., Ltd. Expanded production capacity Fiscal 214 Indonesia / P.T. Bando Indonesia Expanded production capacity Fiscal 213 Key Initiatives for Fiscal 215 Operating environment The external factors that depressed earnings in the previous fiscal year have begun to turn around. In Thailand, the political situation has stabilized, leading to a recovery in automobile output. In China, the resumption of government subsidies has raised expectations for stronger demand for agricultural machinery. In Europe and the U.S., demand looks likely to remain strong for belts, centered on automotive-related applications. In this business environment, we are in position to accelerate earnings growth by focusing our attention on cost reductions while further strengthening marketing activities. More specifically, we are focusing on the key measures outlined below based on the five guidelines of the mid-term business plan: evolution of global market strategy, product evolution, evolution in manufacturing, new businesses creation, and evolution in management quality. Evolution of global market strategy Leveraging our expanded sales network and value chain, we aim to build a globally optimized procurement, production and supply structure while increasing sales and developing new markets. First, we plan to accelerate the development of markets by taking advantage of our expanded production capacity in India, Indonesia, Thailand and China. We are now expanding production in accordance with growing demand for motorcycle belts in India and other Asian countries, as well as for automotive belts in Thailand. At the same time, we are taking steps to bolster our cost competitiveness through the planning and simulation of an optimal production structure to identify which business bases are the best places to produce and supply products. At our plant in Bangalore, India, established in 213, for example, we have been switching to locally produced products and have been improving the cost structure there. In the underdeveloped Greater Mekong market, we are working to enhance recognition of the Bando brand. In addition, we are gaining momentum on measures to strengthen our global marketing system, such as launching in Europe our electronic trading system that has been successfully used in Japan between our sales companies and agencies. Product evolution As for product evolution, we have been expanding product applications to new fields and incrementally adding functions to products with the aim of further increasing the added value of its products. In the Belt Business for example, we updated our product lineup in the Sunline Belt series of light-duty conveyor belts in April 214. Sales of Sunline Belts, which had mainly been used for food conveyance, have grown strongly as a result of expanding their application to the logistics field. Sales growth in Double Cog Belts, super high-performance CVT belts for large buggies and large scooters, has also picked up momentum thanks to customers appreciating their contributions to better fuel economy through improved power transmission efficiency and outstanding durability.» Double Cog Belts We are advancing similar measures in the Elastomer Products Business. In April 214, we released Wallpaper Media for inkjet printers, creating a lineup of products for the wallpaper market under the Bando GLANMESSE brand of films for decorative displays. As new added value, the product features an adhesive coating and compatibility with digital printing, and we are marketing these features to unearth demand in the commercial and residential markets. Our development rollers with longer service life for OA equipment offer vastly improved durability thanks to the use of polyurethane rubber technology, and sales have expanded for this high-value-added product for printers and copiers.» Development Rollers with longer service life 18 BANDO CHEMICAL INDUSTRIES, LTD. Annual Report

12 Message from the President Increasing sales of these high-value-added products requires a finely tuned sensitivity to the particular needs of customers in countries around the world. At the China Technical Center, opened in 212, and the Asia Technical Center, opened in Thailand in 213, we have reinforced our technical service structure by hiring more local staff and focused on the development of products with market-optimized specifications. In addition to making detailed modifications to each product, we are also locally developing new products to fill needs in niche markets, such as tile conveyor belts, in a bid to strengthen our competitiveness in each region. Evolution in manufacturing Within the Group s global network, the Head Office, R&D Center, manufacturing plants and the Power Transmission Technical Research Center in Japan lead the development of environmentally-friendly products and high-value-added businesses. With the evolution in manufacturing guidelines, we aim to strengthen our global competitiveness by improving quality and productivity at our bases in Japan. To this end, we are modernizing production lines at the Kakogawa Plant and the Ashikaga Plant while fostering innovation in manufacturing methods. At the Kakogawa Plant, our main plant for conveyor belts, we are upgrading production lines. Out of a total budget of approximately 2 billion, we plan to invest about.8 billion on capital equipment in fiscal 215 and commence operations on the new production lines in January 216. At the Ashikaga Plant, where precision belts are made, we are upgrading production lines for polyurethane precision belts with the aim of solidifying customer confidence in these products. With an investment of around.2 billion, we plan to start up the new production lines in October 215. The Ashikaga Plant has established a new production method for polyurethane precision belts that we think will lead to lower costs and stronger competitiveness. New business creation: strengthening alliances We have been consistently investing in R&D with the aim of creating new businesses. Using environmental protection, energy conservation and high performance as key objectives in new businesses, we are focusing R&D on the markets for optoelectronics, transportation/automobiles, energy, and robotics, while specifically concentrating on the fields of power electronics, printer electronics, and welfare/nursing care. In fiscal 214, the R&D Center, Manufacturing Planning Center and Power Transmission Technical Research Facility led our efforts in R&D. Spending on research and development, including the development of product improvements, totaled 3,834 million in fiscal 214. As an external alliance to advance new business creation, in September 214, Bando entered into an agreement with Kobe University to promote comprehensive cooperation between industry and academia. Kobe University has been designated by the Ministry of Education, Culture, Sports, Science and Technology as a university to enhance research capabilities with the aim of helping universities create worldclass research programs. Through its alliance with Kobe University, Bando developed C-STRETCH, a completely Sensor»»»»» China Technical Center Asia Technical Center Kakogawa Plant Ashikaga Plant C-STRETCH elastic strain sensor and R&D Kit Analog Bluetooth For Windows 7/8»»» Thermal Conductive Sheets Optically clear adhesive (OCA) Room-temperature sintering silver nanoparticle ink and low-temperature sintering silver nanoparticle bonding material new elastic strain sensor, and released an R&D Kit in July 215. This novel product was made possible with our core technologies in rubber and urethane material mixing design and film processing, combined with conductive material dispersion technologies. Featuring excellent flexibility and softness, the sensor is able to measure large distortions without altering the shape of the measured material. Since it shares a strong affinity with the way people move, we expect the product to sell well in the medical and healthcare fields. As another external alliance, Bando has participated in Japan s Cabinet Office Strategic Innovation Promotion Program (SIP) since October 214. In this program, Bando has been involved in the design and production of tailor-made rubber products using reactive 3D printers, and the research and development of products that create value for society. Bando is developing cross-linked rubber that can be formed into objects using a 3D printer. New business creation: accelerating test marketing and mass production In fiscal 215, we also intend to accelerate the transformation of projects that have been under development for several years into new businesses by working to establish mass production and conducting test marketing. In May 215, we began to test market Thermal Conductive Sheets that help lower the thermal resistance of electronic devices. This product is a rubber sheet with high thermal conductivity made possible with the vertical orientation of thermally conductive filler. It can efficiently transfer heat away from the heat-generating part. We expect the product to satisfy needs in the electronic devices field, such as for power semiconductors and LEDs. In the second half of fiscal 215, we plan to commence the mass production of Free Crystal, an optically clear adhesive (OCA), in thicknesses ranging from 5 μm to 2, μm. Made from the application of Bando s excellent thickfilm technologies, this product is a type of optical film that helps improve the image quality of LCD displays. We expect demand for this product in LCD displays for car navigation systems, for example. In the second half of fiscal 215, we plan to launch the mass production and marketing of room-temperature sintering silver nanoparticle ink. This new product offers better performance than FlowMetal TM, the low-temperature sintering silver nanoparticle product the Company introduced in 28. It was developed for compatibility with a wider range of applications. The new product is an optoelectronic material that can form electronic circuits without heating by providing conductivity after drying at room temperature. Bando has been making steady progress spinning a web of patents related to this technology. Based on the patents that we have already filed and the patents currently under application, we expect to obtain a broad range of intellectual property rights related to receiving layers that can be sintered at room temperature. As another application of FlowMetal TM, low-temperature sintering silver nanoparticle bonding material is an optoelectronic product that can join to circuit boards without damaging electronic devices, such as semiconductor elements, at a melting point of 25 C, which is lower than that of gold-tin alloy solder. We are currently conducting marketing activities for the product in order to expand sales. 2 BANDO CHEMICAL INDUSTRIES, LTD. Annual Report

13 eco moving Enhancing corporate value through the development of environmentally friendly products. Striving to expand our lineup and sales Power transmission belts that have achieved global record-levels of transmission capability High-load V-ribbed belts We are committed to people-friendly and environment-friendly manufacturing. Since 21, Bando is accelerating the development of green products based on its eco moving brand to meet the increasing environmental and energy-saving needs of various industries. With this brand, Bando has quantitatively defined the added value provided to customers as Environmental Claims, and strives to enhance corporate value by expanding the lineup and sales of products that satisfy this criterion. Labeling standards for eco moving products Products receive the eco moving label if they meet any of the following three criteria. Conventional products High-load V-ribbed belts mm 17.8 mm» 7.12 mm Added value 1 This product has an approximate 3% increase in transmission capability for each gradation of belt width (one rib), by making use of high-strength rubber and a high-strength core. 2 The belt width (determined by number of ribs) is only about 2/3 of a conventional belt, while maintaining the same life cycle as the conventional belt. 1 Compared with reference products, shows reduced CO2 emissions over the products life cycle, and meet one or more internally established Environmental Claims (Energy Conservation, Waste Reduction, Use of Ecological Resources (recycled/non-petroleum), Carbon Offset, Resource Conservation, Use of Recycled Materials, Reduction of CO2 Emissions) 2 Be granted certification from a third party operating an environmental certification system Rib rubber: Development and use of a high-strength rubber Core: Highstrength core Contributing to making automobile engines with improved weight reduction, compactness and fuel economy 3 Industry standards may be used for comparison purposes for a new product without a corresponding reference product, so long as the new product meets other necessary criteria Environmental Claims 1. Saving energy The product s energy loss during use is cut by 15% or more, in comparison with the corresponding reference product. 2. Saving resources The raw materials used for the product are reduced by 1% or more by mass, in comparison with the corresponding reference product. 3. Reduction in quantity of waste Product-related waste is reduced by 1% or more by mass when it is used by the customer, in comparison with the corresponding reference product. 4. Using recycled materials The product uses 2% or more by weight recycled materials. 5. Using eco materials The product uses 8% or more eco materials by weight (recycled materials as well as nonpetrochemical natural resources and materials). 6. Reduction of CO2 emissions The product reduces CO2 emissions by 1% or more during its lifecycle, in comparison with the corresponding reference product. Or, the product reduces CO2 emissions by 15% or more during any stage of its lifecycle (material procurement, production, transportation, use, disposal). 7. Carbon offset The product is certified by the carbon offset certification system (third party institution), and the appropriate carbon offset activities have been implemented. Environmentally friendly conveyor belt G-CARRY Added value 1 CO2 reduction by lowering the percentage of petroleumbased materials used from 65% to 37% 2 Approximate 3% reduction in power consumption by decreasing roller abrasion resistance 3 Excellent pliability due to a reduced-ply structure 4 Excellent resistance to impact, sandwiching and tearing due to the special corebody canvas Accelerating the change-over from conventional conveyance products used for such materials as gravel, aggregate, soil, limestone and ore 22 BANDO CHEMICAL INDUSTRIES, LTD. Annual Report

14 Review of Operations Belt Business Leveraging the Company s expanded business foundation to further strengthen our competitiveness Position and Target in the Mid-to-Long Term Business Plan The Belt Business serves as the greatest earnings driver to achieve the Group s mid-to-long term business plan, Breakthroughs for the future. Under BF-1 the first part of that plan which finishes in the fiscal year ending March 31, 218, we will achieve earnings growth centered on this Performance for the Fiscal Year Ended March 31, 215 Automotive Power Transmission Belts Sales of power transmission belts in Japan decreased due to a decrease in automobile production. However, in China sales of accessory drive power transmission belts and of Automatic Tensioners were brisk, and in the U.S. we focused on expanding sales in the aftermarket. Moreover, in Asia there was a decrease of automobile production in Thailand, but sales of variable speed belts for scooters were favorable, including in India. As a result of these and other factors, sub-segment sales climbed 1.9% year on year. Industrial Power Transmission Belts In Japan, sales of power transmission belts increased due to proactive marketing activities rooted in local communities and the introduction of electronic commerce. However, sales declined elsewhere. In China state financial subsidies to agricultural machinery manufacturers ceased, in Thailand the political instability caused a business recession, in Europe there was sluggish capital investment, and in the U.S. the OEM business contracted. As a result, sub-segment sales were down 7.5% year on year. Conveyor Belts In Japan, we enjoyed increased sales of conveyor belts for steel works and of light-duty conveyor belts for the distribution industry. In Asia, sales of conveyor belts increased, and in Southeast Asia sales of light-duty conveyor belts rose. As a result, sub-segment sales increased 5.2% year on year. Segment profit declined 15.1% year on year to 4,155 million, mainly due to increased personnel expenses at our expanded overseas production bases, offset by the benefits of cost reductions. segment in a bid to solidify our growth foundation for the five-year period of BF-2 (from the fiscal year ending March 31, 219 to the fiscal year ending March 31, 223) and beyond. The segment achieved net sales of 78,11 million, up.8% from the previous fiscal year. Sub-segment results are as follows. Sales of Automotive Power Transmission Belts by Product ( billion) Other Power transmission system products Power transmission belts Note: Sales by product represents the figure after deduction of inter-segment transactions. Sales of Industrial Power Transmission Belts by Product ( billion) Other For industrial and agricultural machinery Note: Sales by product represents the figure after deduction of inter-segment transactions. Sales of Conveyor Belts by Product ( billion) Industrial products Light-duty conveyor belts Conveyor belts Note: Sales by product represents the figure after deduction of inter-segment transactions. Market Conditions The worldwide sales volume of automotive components in 214 was approximately 96 trillion. It is expected to grow firmly going forward, and to reach approximately 114 trillion in 22. Looking at the annual average growth rate, growth is forecast of 6.9% per year for BRICS, and 5.7% per year for China. Key Initiatives for the Fiscal Year Ending March 31, 216 We will continue our initiatives designed to continuously solidify our leading position in Asia s belt markets. In terms of sales activities, we will make full use of the business foundation that we have been expanding up to last fiscal year in China, India and the ASEAN region, and we will strive further to deeply cultivate markets. In product development, we will seek to increase the added value of existing products, and focus on achieving such product features as reduced environmental impact, higher efficiency, compactness and multi-functionality. In Japan, which we have positioned as the core to improve the global competitiveness of our products, we will push ahead with manufacturing innovations, upgrade our production technology and cost competitiveness, and strive to expand production in China, India and the ASEAN region. Net sales and segment profit Automotive Component Market Value by Region Total CAGR: 2.9% ( billion) RoW BRI China Japan /Korea NAFTA Europe 96,746 5,82 7,397 21,322 15,955 22,772 23, ,732 7,832 11,24 29,734 13,924 25,673 26, e Source: Global Automotive Supplier Study 214/Roland Berger/Lazard (results) Change CAGR 214, 2 5.1% 6.9% 5.7% -2.2% 2.% 2.1% % change Net sales 77,483 78, % Automotive power transmission belts 44,833 45, % Industrial power transmission belts 14,88 13,765 (1,115) 7.5% Conveyor belts 17,634 18, % Segment profit 4,892 4,155 (737) 15.1% Ongoing capital investment (for the fiscal year ending Mar. 31, 216) Location Description Amount invested Expected completion date Nankai Plant Expansion of equipment relating to power transmission belts, etc. 574 Mar. 216 Kakogawa Plant Expansion of equipment relating to industrial products, including conveyor belts, etc. 974 Mar. 216 Wakayama Plant Expansion of equipment relating to power transmission belts, etc. 59 Mar. 216 Power Transmission Technical Research Center Investment in testing and research facilities 84 Mar. 216 Bando USA, Inc. 221 Mar. 216 Bando Korea Co., Ltd. Expansion of equipment relating to power 32 Mar. 216 Bando Belt (Tianjin) Co., Ltd. transmission belts, etc. 212 Mar. 216 Bando Manufacturing (Thailand) Ltd. 448 Mar. 216 ( million) ( million) 24 BANDO CHEMICAL INDUSTRIES, LTD. Annual Report

15 Elastomer Products Business Accelerating the change to a high-added-value product portfolio Market Conditions Worldwide Copier and Multifunction Printer Shipment Forecast on a Quantity Basis (Million units) ( billion) 6 7 Quantity of color copiers Quantity of black-and-white copiers Monetary amount of color copiers Monetary amount of 3 35 black-and-white copiers Position and Target in the Mid-to-Long Term Business Plan The Elastomer Products Business offers clean, high performance products made of elastomers and resins in a bid to contribute to target achievement in the midto-long term business plan, Breakthroughs for the future (from the fiscal year ended March 31, 214 to the fiscal year ending March 31, 223). As our second core business Performance for the Fiscal Year Ended March 31, 215 Precision Parts We increased sales of new types of high-performance rollers for major office machinery equipment manufacturers, and achieved strong sales of precision belts. Sales of precision polishing materials in the optoelectronics market gradually increased. As a result of these and other factors, sub-segment sales increased 8.1% year on year. High-Performance Films Despite sales of new premium wall covering film products, sales of film used in construction materials decreased due to decreased demand following the consumption tax increase. As a result of these and other factors, sub-segment sales decreased 3.3% year on year. Segment profit increased 16.9% year on year to 329 million mainly due to favorable growth in sales of products with comparatively high added value, including high-performance rollers and precision polishing materials. after the Belt Business, the Elastomer Products Business will achieve steady growth by accelerating the change to a high-added-value product portfolio, aimed at driving forward the uses of our core elastomer and resin compound design, dispersion and processing technologies. For the fiscal year ended March 31, 215, net sales grew 4.8% year on year, to 15,713 million. Sub-segment results are as follows. Sales of Precision Parts Business by Product ( billion) ( billion) 6 Other Precision belts Blades, high performance rollers Note: Sales by product represents the figure after deduction of inter-segment transactions. Sales of High-Performance Films Business by Product Other Medical-related Manufacturing materials Decorative display Construction materials Note: Sales by product represents the figure after deduction of inter-segment transactions. Global shipment quantities in the copier and multi-function printer markets, which include major customers for our precision parts business, are expected to grow around 3.8% in 215 and around 2.6% in 216*. While the Japanese market for color copiers is somewhat saturated and the time between replacements is longer, we expect increased demand for color copiers in Europe and the U.S., and for black-and-white copiers in Asia. * Quantitative base The number of domestic housing starts, which are closely linked to sales of high-performance film products, is basically projected to decrease going forward. Nevertheless, the renovation market, which is another target market, is projected to maintain its market size due to the increasing service life of housing. Source: News Release published on June 15, 215, Nomura Research Institute, Ltd. Key Initiatives for the Fiscal Year Ending March 31, 216 We will continue to refine our technologies for compounding, dispersing and combining elastomers and resins, which are our core technologies, and accelerate our actions to rebuild our product portfolio with a greater emphasis on high value-added products. In precision parts business, we will focus on increasing sales and earnings centered on TOPX Precision Abrasive Film and the BANDO MDEC cleaning system in the growing optoelectronics market. Moreover, we will greatly increase the added value of products for printer-related markets by concentrating on markets which (Projection) (Forecast) (Forecast) ( trillion) 1. Source: Japan Business Machine and Information System Industries Association's Projections of 214 global shipments of office machinery, and forecasts for 215 and 216 (published February 6, 215). Performance and Forecasts of Size of Housing Renovation Market demand high durability and high quality. In high-performance films business, we will focus on proprietary brand products and strive to expand our market share in the volume zone of the domestic market, and we aim to further expand sales overseas. Moreover, as one of our initiatives to realize business structural reforms, we will accelerate making full use of and evolving our own technology (films, adhesive materials, ink-jet printing), and engage in the decorative products business. Net sales and segment profit ( million) (results) Change % change Net sales 14,989 15, % Precision equipment parts 1,263 11, % High-performance films 4,77 4,55 (157) 3.3% Segment profit % Ongoing capital investment (for the fiscal year ending Mar. 31, 216) ( million) Location Description Amount invested Expected completion date Nankai Plant Expansion of equipment relating to chemical products, etc. 27 Mar. 216 Ashikaga Plant Expansion of equipment relating to industrial products and power transmission belts, etc. 565 Mar in a broad sense in a narrow sense Performance Forecast (Year) *Size of the narrow-sense renovation market: This refers to extension and reconstruction building that is recorded under housing starts, statistically new housing, together with repair and maintenance costs for facilities, etc. *Size of the broad-sense renovation market: This refers to the size of the narrow-sense renovation market plus a financial amount that mainly comprises the purchase costs of consumer durables related to the renovation including air conditioners and furniture, etc. and the purchase costs of interior goods, etc. Source: Extracted from the Center for Housing Renovation and Dispute Settlement Support's Size of Housing Renovation Market (published 213). Forecasts are provided by NRI. 26 BANDO CHEMICAL INDUSTRIES, LTD. Annual Report

16 CSR Note: The tables below refer to Bando s domestic facilities in Japan. Basic Stance on Corporate Social Responsibility (CSR) The Bando Group s stance on CSR lies in business activities rooted in the positive contributions it makes to people s lives and the development of society, which are embodied in the Group s management philosophy. In an effort to harmoniously coexist with stakeholders customers, shareholders and investors, employees, business partners (including suppliers and retailers), and local communities it is vital that we provide products and services that meet the needs of society while undertaking business activities that help preserve the global environment. The chief objective of the Group s CSR activities is to gain the trust of society, which is consistent with its corporate culture and in keeping with its obligations to stakeholders. CSR Management The Bando Group s CSR promotion system is led by the Company s CSR Promotion Committee. Chaired by Bando s executive in charge of CSR, the CSR Promotion Committee decides on CSR policy for the entire Group, and monitors committees established for each CSR promotion theme as well as the CSR functions of individual departments. The Committee is also responsible for prioritizing issues, tracking the progress of CSR activities, promoting public information disclosure, and interacting with stakeholders. CSR Promotion Themes and Major Achievements in Fiscal 214 CSR promotion themes Major achievements CSR promotion themes Major achievements The Group engaged in various activities in line with six CSR promotion themes. Compliance/Business Ethics Legal compliance and acting with integrity to gain the trust of society Legal Compliance Committee Held lectures for affiliates about the Bando Group Code of Conduct Installed a system to detect tampering on our websites, and taught information security using e-learning Human Rights/Labor/Safety Allow employee growth through their work, and provide safe, dynamic workplaces Head Office Health and Safety Committee; Human Resources Department; Manufacturing Planning Center, Safety and Environmental Promotion Department Held mental health classes and walking activities Enhanced training programs for each career stage and position Health and safety education and installation of disaster simulation equipment (Three work-related injuries resulted in lost time during the fiscal year under review) The Environment Work for environmental preservation by developing eco-friendly products and by being attentive to the environment in manufacturing practices Head Office Environment Committee; Manufacturing Planning Center, Safety and Environmental Promotion Department Reduced unit volume of waste generation by 2.5% Reduced unit volume of energy consumption by 4.7% Suppressed VOC gas emissions by 66.7% (compared to fiscal 2) Conducted energy conversion to LNG by using ESCO at Wakayama Plant Social Contribution Recognize the importance of communication with society, individual contributions to the community, and company-wide contributions to society for environmental preservation General Administration Department Supported volunteer activities Participated in activities organized by local resident associations, and cleanup, public safety and disaster prevention initiatives Conducted tours of Company facilities President Head office/ business facilities Group affiliates CSR Promotion Committee Chair: Executive in charge of CSR CSR Promotion Committee secretariat Quality Provide safe and reliable products and services Manufacturing Planning Center, Quality Control Department Held QC Circle activities and conventions in Japan and overseas Convened a product quality case study exhibition Implementation of an assessment of product conformity to standards Updated the information management system for chemicals used as raw materials Information Disclosure Timely and proper information disclosure to stakeholders Finance and Accounting Department; General Administration Department Convened procurement policy briefings Published periodic CSR reports and business reports, and provided information via the Group s websites Held investor relations briefings Reduction of Energy Consumption Energy consumption (KL/GJ) 4, 35, 3, In fiscal 214, at the Wakayama Plant we started using air conditioning using exhaust heat. Although this reduced the energy consumption by 3.6% compared to the previous fiscal year, we failed to reach our target volume of energy consumption. Emission and Transfer Volumes of PRTR Substances PRTR substance emission and transfer volumes (t) FY27 FY28 FY29 FY21 FY211 FY212 FY213 FY214 We identified materials we handle that are listed in the Pollutant Release and Transfer Register, and are working to reduce their use mainly by appropriate management and substituting other materials. Environmental Accounting Curtailment of Waste Generation FY27 FY28 FY29 FY21 FY211 FY212 FY213 FY214 The Company s industrial waste largely consists of rubber and plastics. Since recycling rubber is difficult, Bando works to curtail the generation of this type of waste. Reduction of VOC Gas Emissions FY27 FY28 FY29 FY21 FY211 FY212 FY213 FY214 In fiscal 214, we updated our VOC detoxification facilities and ensured proper VOC handling. In so doing, we achieved a 61% reduction in VOC compared with fiscal 2, exceeding the industry s target of 5%. The Company uses environmental accounting tools to determine and manage overall environmental costs, effectiveness, and volumes. ( thousand) Fiscal 212 Fiscal 213 Fiscal 214 Environmental Conservation Costs Business area cost Capital investment Depreciation and amortization + personnel expenses + overhead Capital investment Depreciation and amortization + personnel expenses + overhead Capital investment Depreciation and amortization + personnel expenses + overhead Pollution control 7,387 68, ,425 13,78 59,535 Global environmental conservation Energy consumption (KL/GJ) 25, FY27 FY28 FY29 FY21 FY211 FY212 FY213 FY214 Transfer volume (t) Emission volume (t) Transfer volume + emission volume 97,82 3,976 14,77 5,91 3,344 3,623 Main projects in fiscal 214 Revamped underground tank, installed dirt collector Switched to LED lighting, updated facilities Resource recycling 172, , ,114 Industrial waste treatment and disposal Upstream/downstream cost Administration cost 11,231 35,63 23,35 Monitored and measured environmental burden, operated management systems R&D cost 1,56 34,33 31,354 29,493 Developed products with reduced environmental burden Social activity cost 168 9,59 3,715 8,396 5,634 Greening and beautification costs, environmental and social activities Environmental remediation cost 722 1,177 Total 115, ,448 19,64 374,532 17, ,927 (t) 8, ( thousand) Environmental conservation benefit Fiscal 212 Fiscal 213 Fiscal 214 Business area 51,195 59,518 2,77 Upstream/downstream Other Total 51,442 59,61 2,77 Waste generation 6, 4, 2, VOC emission volume (t) Waste generation (t) Fiscal 214 emission target: 15 t Target 28 BANDO CHEMICAL INDUSTRIES, LTD. Annual Report

17 Corporate Governance Basic Stance on Corporate Governance In order to improve corporate value, the actions of the Company are based on an adherence to the law and social norms as a member of society. In addition, the Company recognizes the importance of building positive relationships with customers (end users), current and potential investors, business partners, local communities and others. Accordingly, the Company focuses on ensuring sound, transparent and efficient management by enhancing its corporate governance system. Board of Directors The Company maintains a system centered on directors and audit & supervisory board members to ensure management efficiency and to strengthen its audit and supervisory functions. The Company s Board of Directors consists of six directors, including two external directors (as of June 215). The Board makes decisions concerning basic management policies, important management issues, and legally stipulated matters, as well as monitoring the work performance of directors and corporate executive officers. As a rule, the Board meets once per month. In addition, the Company maintains a corporate executive officer system to improve operational efficiency and speed, and has established the Management Advisory Council to assist the president with management decisions. In the fiscal year ended March 31, 215, Board of Directors Meetings were held 15 times, with the external director attending 1% of those meetings. Audit & Supervisory Board The Company has adopted an audit & supervisory board member system. The Audit & Supervisory Board consists of one internal and three external audit & supervisory board members. The internal audit & supervisory board member and one external audit & supervisory board member serve on a full-time basis. The Audit & Supervisory Board Meeting is held every month. All of the Company s audit & supervisory board members attend Board of Directors meetings and monthly management conferences. Moreover, the Audit & Supervisory Board assigns individual audit & supervisory board members to attend various internal committee meetings and conduct hearings to determine the operational status of subsidiaries when deemed necessary. Through these and other actions, the audit & supervisory board member system is able to fully monitor the performance of directors and corporate executive officers. In the fiscal year ended March 31, 215, the Audit & Supervisory Board met 13 times, with the three external audit & supervisory board members attending 97% of those meetings. Nominating Committee and Compensation Committee Despite having no legal obligation under the Companies Act, the Company has established the Nominating Committee and Compensation Committee to serve as consultative bodies of the Board of Directors in an effort to further strengthen corporate governance. Decisions regarding director appointments and compensation are made by a resolution of the Board of Directors following deliberations by the Nominating and Compensation committees. In addition, these committees include the external director and external audit & supervisory board members who have been designated as independent executives to maintain a highly transparent system for making decisions about director nominations and compensation. In the fiscal year ended March 31, 215, the total amount of director and audit & supervisory board member compensation is shown below. Number of Persons Total Compensation Directors 8 93 million Audit & Supervisory Board Members 5 54 million Total million Compensation Limit 24 million or less annually 7 million or less monthly Notes: 1. As of March 31, 215, there are five directors (including one external director) and four audit & supervisory board members (including three external audit & supervisory board members) 2. The numbers above include three directors who resigned at the conclusion of the ordinary general meeting of shareholders held on June 24, 214, and one audit & supervisory board member who retired on April 27, The total amount of external director and external audit & supervisory board member compensation listed above is as follows. One external director: 8 million Four external audit & supervisory board members: 34 million 4. The total amount of director compensation includes performance-related salary based on the Company s performance-related salary criteria (for full-time basis directors only) for the fiscal year ended March 31, 215. Performancerelated salary will not be paid for the fiscal year ended March 31, 215 because the performance did not satisfy the criteria. 5. In addition to the above-listed information, salaries and bonuses for employees who concurrently serve as directors are as follows. Three employee salaries: 34 million Two employee bonuses: 11 million 6. In addition to the above-listed information, retirement benefit for a retired director was paid pursuant to the resolution at the ordinary general meeting of shareholders held in 24 as below. One director: 71 million Management organization and corporate governance Election Audit & Supervisory Board/ Audit & Supervisory Board Members Audit Election Monitor Internal Control General Meeting of Shareholders Board of Directors President/ Corporate Executive Officers Executive Organizational Units To meet the requirements stipulated in the Financial Instruments and Exchange Act pertaining to financial reporting performed by internal control reporting systems, the Bando Group maintains internal control in accordance with the basic frameworks for internal control outlined in Financial Services Agency criteria, and undertakes evaluations and reporting as defined by said criteria. The Company will work to further improve the effectiveness of internal control primarily through the Internal Control Promotion Office and based on the four objectives of internal control: (1) reliability of financial reporting, (2) operational effectiveness and efficiency, (3) legal compliance regarding business activities, and (4) asset protection. Basic Stance on the Elimination of Antisocial Forces The Group takes stringent measures to eliminate antisocial forces by investigating prospective business partners prior to commencing new transactions based on relevant Group policies and the Bando Group Code of Conduct, which stresses the overriding importance of adhering to the law and corporate ethics. In addition, the Group maintains an internal reporting Nominating Committee Compensation Committee Accounting audit Appointment Accounting Auditors/ Certified Public Accountants 3 BANDO CHEMICAL INDUSTRIES, LTD. Annual Report

18 Corporate Governance Management (As of June 23, 215) system to thoroughly raise awareness of the necessity of avoiding any actions that are illegal or contrary to corporate ethics. In the event that a business partner is revealed to be an antisocial organization, the Group will immediately dissolve its relationship with this organization. Compliance Promotion The Group has formulated and distributes to all Group executives and employees the Bando Group Code of Conduct, which stipulates proper actions in such areas as compliance with laws and corporate ethics, product and service safety, honest and fair business activities, and fair and equitable procurement transactions. In addition, the Group works to raise awareness of compliance by designating October as the Bando Group Corporate Ethics Month, conducting training sessions on the Bando Group Code of Conduct at Company business facilities or domestic and overseas affiliates every other year, and providing opportunities to discuss these topics internally. Moreover, the Group has established a system to further promote compliance by adopting an internal reporting system that includes external lawyers as well as a service for providing information on the formulation, revision and abolition of relevant laws. Internal Audits Information Disclosure The Company promotes fair and highly transparent management by disclosing important information in an appropriate and timely manner to shareholders and all other stakeholders. The Company maintains PR functions that include timely information disclosure by the General Administration Department. In addition, the Company has established a system to facilitate the timely disclosure of information to stock exchanges and discloses such information on the Company website. Board of Directors President and Representative Director: Mitsutaka Yoshii Director: Shinji Kashiwada Representative Director: Yoshihisa Tamagaki External Director: Yutaka Kato Director: Kyosuke Nakamura External Director: Takashi Shigematsu The Company has established the Internal Audit Department, an independent organization that is staffed by four people reporting directly to the president. The Internal Audit Department implements systematic and comprehensive internal audits (which include the internal control system) of all departments as well as domestic and overseas affiliates. Accompanied by audit & supervisory board members, the Internal Audit Department conducts on-site audits within the Company and at affiliates, the results of which are reported to the president, directors and audit & supervisory board members. Audit & Supervisory Board Members Audit & Supervisory Board Member: (full-time) Shinichiro Miyamoto External Audit & Supervisory Board Member: (full-time) Takahiro Matsusaka External Audit & Supervisory Board Members: Hiroshi Kii Toru Tada Corporate Executive Officers President: Mitsutaka Yoshii Senior Executive Officers: Yoshihisa Tamagaki Masao Ohara Keiji Iwai Masayuki Kitabayashi Hisashi Samejima Kyosuke Nakamura Executive Officers: Yoshitaka Oshima Shinji Kashiwada Joseph David Laudadio Katsuhiko Hata Katsuya Yamaguchi Takayuki Nagase Kazuyuki Mamba Satoshi Matsuo 32 BANDO CHEMICAL INDUSTRIES, LTD. Annual Report

19 Message from Bando s External Director Management s Discussion and Analysis Supporting global growth and transition to a new stage of management, aiming to maximize corporate value Yutaka Kato External Director In June 215, the Corporate Governance Code was officially announced in Japan. I provide support for venture companies and management guidance for Japanese and foreign companies as a business scholar and a specialist in managerial accounting and cost accounting. Drawing from my experience in these capacities, I believe the reforms in corporate governance taking place in Japan are a logical step forward for Japanese companies. Bando is moving in a direction that agrees with the Corporate Governance Code. While collaborating with newly appointed External Director Takashi Shigematsu, I will do my best to effectively support decision-making on such issues as management strategy, Bando s unwavering commitment to global business development, and the launch of new businesses. Lately, it has become more important for listed companies to work closely with stakeholders other than their shareholders, including employees, customers, suppliers, creditors and local communities, in order to continue growing and enhance corporate value over the medium- and long- terms. In this regard as well, I vigorously support the efforts of Bando. Bando continues to engage in CSR activities, and I think that the Company has put in place an effective platform for collaborating with their stakeholders. Among Bando s initiatives, I would like to highlight the Company s decision in 214 to launch a comprehensive industry-academia relationship with Kobe University, and its participation in the Cabinet Office Strategic Innovation Promotion Program (SIP). Both of these initiatives entail cooperation with public institutions and are closely related with the development of the new businesses that will carry the future for Bando. When these initiatives coalesce into Bando s growth, I believe Bando will have transitioned to a new stage of a sustained increase in corporate value. Operating Environment During the fiscal year ended March 31, 215, the United States economy steadily recovered due to improved employment conditions and a rebound in personal consumption. In Europe, although the region faced geopolitical risks and sovereign debt problems, there were signs of economic recovery. On the other hand, in ASEAN and China, there was a general slowing of growth, and, notably in Thailand, economic stagnation continued due to political instability. In Japan, while there was a reactive decline to last-minute demand before the consumption tax increase, the yen continued to depreciate and stock prices rose amid an easing of monetary policy and the economy remained on a modest recovery track through the second half. Automotive is a key market for the Bando Group. Despite firm automobile production in the United States and China, there was a substantial decrease of production in Thailand. In Japan, harsh conditions continued with a decrease in automobile production and an increase in the production of beltless vehicles, especially hybrid vehicles. Meanwhile, in the industrial machinery field, domestic demand for capital investment remained strong, but the housing and architectural field, a major market for high-performance film, suffered a protracted slump in demand after the consumption tax increase. Business Overview Under these market conditions, the Bando Group, in line with the second year of the first stage of our mid-to-long term business plan Breakthroughs for the future, from fiscal 213 to fiscal 222, sought to achieve its aspirations for fiscal 222, and aggressively Net sales* ( million) 1, 8, 6, 4, 2, 84,811 86,372 85,772 93,434 95,396 worked to meet targets in the plan based on five guidelines including evolution of global market strategy. Specifically, the Bando Group focused on expanding its production capacity in China and Asia, proactively carrying out its marketing activities, reinforcing its sales system for the Hyper Flat Drive (HFD ) System, which won the Grand Prize for Excellence in Energy Efficiency. We also focused on creating new products and businesses, including the start of new product development through industry, university, and government cooperation. Operating Results As a result of our efforts, consolidated net sales in the fiscal year ended March 31, 215 increased 2.1% year on year to 95,396 million, buoyed by the effects of weaker Japanese yen exchange rates. Operating income decreased 13.1% to 4,797 million. This was due to an increase in personnel following the expansion of our global production system, an increase in labor costs due to a rise in actuarial differences pertaining to retirement benefit obligations in Japan, and other factors, offset by the effects of cost cutting and a higher sales gross profit margin. The cost to sales ratio improved.1 point to 73.4%, but the SG&A ratio rose 1. point over the previous fiscal year due to an increase in labor costs. As a result, the operating margin decreased.9 point to 5.%. Net income declined 12.2% year on year to 3,757 million, mainly due to a decrease in operating income and the booking of an extraordinary loss owing to an impairment loss on fixed assets. Operating income* ( million) 6, 4, 2, 5,56 4,571 4,95 5,518 4, * Fiscal year endings are March BANDO CHEMICAL INDUSTRIES, LTD. Annual Report

20 Management s Discussion and Analysis Operating Results by Business Segment Belt Business Sales of automotive accessory drive power transmission belt and system products increased overall due to continued brisk sales in the United States and China, despite decreased automobile production in Japan and Thailand. Sales of variable speed belts for scooters increased on continued market growth for two-wheeled vehicles in Asia. Sales for industrial power transmission belt products also increased buoyed by strong demand for capital investment in Japan and the success of locally based sales. Sales of belts for agricultural machinery decreased due to the temporary suspension of subsidies for the purchase of agricultural machinery in China and lower demand for agricultural machinery caused by political turmoil in Thailand. Overseas sales of conveyor belts for resource development declined, despite strong sales of conveyor belts for steel in Japan. Sales of resin conveyor belts (Sunline TM Belts) were strong in Japan s distribution field. Segment net sales increased.8% year-on-year to 78,11 million, and segment profit fell 15.1% to 4,155 million. Elastomer Products Business In precision performance products, sales of cleaning blades declined due to in-house production by major customers, but strong sales of precision belts used in office machinery and new high-performance roller products contributed to sales growth. Sales of precision polishing products, which had been promoted to the Net income* ( million) 5, 4, 3, 2, 1, 3,333 1,44 2,51 4,28 3, optoelectronics market, gradually increased. In high-performance film products, despite sales of new premium wall covering film products, sales of film used in construction materials decreased due to protracted sluggish demand in the housing market following the consumption tax increase. In light of these deteriorating market conditions, the Company had an impairment loss on fixed assets of the Nankai Plant where it manufactures high-performance film products and recorded an extraordinary loss of 41 million. Segment net sales increased 4.8% year-on-year to 15,713 million, and segment profit rose 16.9% to 329 million. Other Business Bando is engaged in other business, such as the manufacture and sales of robot-related devices. Sales in other business grew 18.6% year-on-year to 2,646 million. Segment profit increased 5.7% to 198 million. Financial Position Total assets as of March 31, 215 increased 5,77 million to 94,7 million compared with the previous fiscal year-end. This was due to a 3,578 million increase in cash and cash equivalents (current assets) and a 915 million increase in other asset, largely reflecting a rise in share prices of investments in securities. Total liabilities decreased 2,422 million compared with the previous fiscal year-end to 37,923 million. Current liabilities decreased 813 million, and long-term liabilities fell 1,68 million due to a decrease in net defined benefit liability. Net assets increased 7,5 million from the previous fiscal year-end to 56,777 million. Net assets Total assets* Net assets ( million) 1, 8, 6, 4, 2, Total assets 82,95 4,542 79,659 39,444 82,27 43,226 89,623 49,277 94,7 56, Retained earnings increased 3,386 million due partly to the booking of net income, and accumulated other comprehensive income increased 4,127 million largely on foreign currency translation adjustments. As a result, the equity ratio increased 5. percentage points from 54.4% at the previous fiscal year-end to 59.4%. Capital Investment and Fund Procurement Capital investment undertaken in the fiscal year-ended March 31, 215 totaled 4,198 million. Major capital investment items are shown below. The financing required was obtained from the following sources: the Company s own funds, the liquidation of notes and accounts receivable, and borrowings. Business Segment Amount ( million) Belts 2,688 Elastomer Products 645 Other 864 Total 4,198 Cash Flow Main Activities Installed new-and expanded or upgraded-existing manufacturing equipment, upgraded molds Streamlined and improved the energy efficiency of manufacturing equipment, improved manufacturing processes Installed new and expanded or upgraded system and research equipment Net cash provided by operating activities totaled 8,61 million, compared with 6,459 million in the previous fiscal year, with the recording of income before income taxes and minority interests of 5,32 million and depreciation and amortization of 4,386. Net cash used in investing activities was 3,931 million, compared with 5,38 million used in the previous fiscal year. This was primarily due to the booking of 2,945 million in expenses for purchase of property, plant and equipment. Net cash used in financing activities was 2,472 million, compared with 1,548 million in the previous fiscal year, largely reflecting cash dividends paid totaling 941 million and the decrease in short-term borrowings of 763 million. As a result, cash and cash equivalents as of March 31, 215 totaled 15,697 million, up 2,715 million compared with the previous fiscal year-end. Earnings Forecasts for the Year Ending March 31, 216 The macro economy in the year ending March 31, 216 is expected to remain on a moderate growth path, despite continued economic growth in ASEAN. Depending on financial market trends in China, there are concerns that growth could further slow. Meanwhile, a strong U.S. economy is expected on improved unemployment and strong consumer spending, while in Japan, improved employment conditions and a rebound in consumer spending are expected. Moreover, we foresee continued robust growth in the year ahead for our principal customer segment, the automotive industry, on increased global production volumes for automobiles and two-wheeled vehicles. Based on this prognosis, the Group will take priority measures in the third year of the Breakthroughs for the future mid-to-long term business plan. We forecast consolidated net sales of 1, million, up 4.8% year on year, operating income of 5,8 million, up 2.9%, and net income of 4,5 million, up 19.7%. Basic Policy Regarding the Distribution of Profits The Company s basic policy is to enhance profits and maintain stable dividend payments to shareholders while taking into consideration its earnings position. In addition, distribution of profits is based on an examination of total shareholder returns, including share repurchases. Internal reserves are invested over the long term in such areas as R&D; new product, production technology and market development; the strengthening of business structure; internationalization; and the expansion into new business domains. Through these initiatives, we will work to further increase corporate value. In line with this basic policy, we paid a yearend dividend of 5 per share for the fiscal year ended March 31, 215, the same as the previous fiscal year, and an annual dividend of 1 per share including the interim dividend, also the same as the previous fiscal year. We plan to pay a dividend of 12 per share, a 2 increase, in the fiscal year ending March 31, 216. * Fiscal year endings are March BANDO CHEMICAL INDUSTRIES, LTD. Annual Report

21 Business Risks Message from the CFO The Group considers the following to be important risks related to the performance and financial position of the Bando Group that could have a material effect on the decisions of investors. The forward-looking statements listed in this document are based on judgments made by the Group as of March 31, 215. Maintaining and improving a healthy financial position in support of the Breakthroughs for the future" business plan Yoshitaka Oshima Executive Officer, and Chief Financial Officer Increasing Overseas Transactions The Group primarily uses foreign exchange contracts to hedge the risks associated with the significant number of foreign currency receivables it currently carries, and will implement other appropriate measures to hedge against such risks in the future. Nevertheless, the Group s performance could be adversely affected by fluctuations in foreign currency exchange rates. In addition, the Group s performance and financial position could be adversely affected by changes in economic conditions in individual regions, despite efforts to strengthen its overseas production and sales systems. Recalls As a components manufacturer, the Company delivers items to automotive, office automation equipment, consumer product and other manufacturers. In addition, its subsidiaries and affiliates mainly manufacture, process and sell these parts. Considering product quality to be of paramount importance for maintaining and developing current business operations, the Group focuses on implementing various initiatives to ensure product quality to the maximum extent possible. However, recalls and other actions could arise in cases where defects in automobiles and other items are caused by products (components) supplied by the Group. In such cases, the Group will likely be required to cover all obligatory legal or contractual costs of recalls and other actions, which could adversely affect the Group s performance. Raw Material Market Fluctuations and Procurement The Group negotiates with business partners regarding delivery dates and prices by closely examining market prices as well as supply-demand circumstances, but there could be sharply rising raw material prices accompanying higher crude oil prices. Accordingly, the Group promotes research on alternative materials to stabilize supply and demand; revises and increases product prices in response to rising raw material prices; and strengthens measures to reduce overall costs. Nevertheless, the Group s performance could be adversely affected by a downturn in demand, or prolonged increases in material and/or fuel prices that exceed expectations. Earthquakes and Other Natural Disasters There are indications that a major earthquake could occur in the Tokai, Tonankai or Nankai regions of Japan. In addition, the potential for typhoons and floods exists. In the event of such a disaster, business sites including the Nankai Plant could sustain damage to production or other facilities, potentially leading to a temporary cessation of operations. Accordingly, each of the Company s four plants has formulated a business continuity plan (BCP) based on the assumption that it could be damaged under such circumstances. The BCPs include creating mechanisms to minimize disruptions to operations, notably the formulation of repair plans and the supplementary supply of products by overseas plants. Nevertheless, the Group s performance could be significantly impacted by disasters, depending on the size of the disaster. The Bando Group has set the following specific targets under the first stage of the Breakthroughs for the future mid-to-long term business plan. Consolidated targets in the final year of BF-1 in the mid-to-long term plan Fiscal 217 net sales Fiscal 217 operating income 1 billion 1 billion Fiscal 217 ROA 6.% The following guidelines will drive our business to make these targets: 1) Evolution of global market strategy, 2) Product evolution, 3) Evolution in manufacturing, 4) New businesses creation, and 5) Evolution in management quality. In my role as CFO, I am focusing my attention on efficiently raising the funds necessary for strategic investment to maintain and improve our healthy financial position, based on the fifth guideline on evolution in management quality. During the fiveyear BF-1, we plan total capital investment of 25, million and will also invest 5, million in R&D to support the development of new businesses, in addition to our normal R&D investment. We have diversified our fundraising methods since we were rated* by the credit ratings agency Rating and Investment Information, Inc. in fiscal 27. We aim to choose the optimum fundraising method by contrasting the characteristics of the target investment with the interest rate and foreign-exchange trends on the market. * Rating as of March 31, 215: BBB+ (Issuer Rating)/a-2 (Short-term Rating) Healthy financial position Cash balance exceeds interest-bearing debt We have improved our cash balance to the extent that it exceeded our interest-bearing debt by the end of fiscal 214. This was achieved through cash flows generated by strategic investment in growth products, defined through stronger management of our global portfolio, although our net interest-bearing debt was 2,6 million in fiscal 213. We also aim to maintain this trend from now on. Improving the equity ratio The equity ratio reached an all-time high of 59.4%, due to contributions from net income of 3,757 million and an increase in foreign currency translation adjustment of 3,24 million. Achieving our ROA target, and ROE Strategic investment is necessary for growth, but we must invest judiciously if we are to maintain a healthy financial position. Our ROA target of 6% is based on total assets of around 1, million when operating income reaches 1, million ( 6,4 million on a net income basis). Accordingly, we will monitor and control any change in assets such that there is no significant increase in the balance of total assets from the 94,7 million as of March 31, 215. If we achieve our ROA target, past trends suggest that ROE could surpass the previous all-time high of 12.3% in fiscal 27, although this is not a direct target indicator for us. Our ROE in fiscal 214 was 7.2%, and basically and essentially we aim to maintain a value of 1% or more. Managing financial risk We cannot ignore political change and other geopolitical risk that may impact our subsidiaries overseas, as well as foreign exchange and interest rate risk in Japan, including measures to counter the strong yen and a reversal of low interest rates. To hedge against such risks, we gather information from a consolidated business management perspective and need to respond rapidly to unusual events. We are steadily working on this and trying to prepare countermeasures based on various hypothetical scenarios. 38 BANDO CHEMICAL INDUSTRIES, LTD. Annual Report